Negative gearing: the facts for property investors

Over the past few months most of you would have read or heard about negative gearing in the media. There has been heated discussion both in favour and against current negative gearing policy, as well as examination of the potential risks and benefits for investors.

Although we would prefer to remain apolitical, we at BMT are concerned about the current proposals to make changes to property tax concessions and the potential impact on our clients.

We are therefore including some information to help you to understand the impact of the different policies.

What is negative gearing?

As you know, when you invest in a property, the cash flow position will depend on the income earned and outgoing expenses such as interest repayments, council rates, insurance, property management fees, repairs and maintenance or other miscellaneous costs.

In a situation where an investor is receiving a higher rental return than the outgoing expenses, the property will have positive cash flow and the owner will pay tax on this income earned at their top marginal tax rate.

By contrast, a negatively geared property has a rental income which is less than the outgoing expenses including deductible losses. Therefore the property investor is making a cash loss on their investment.

Currently, income producing property owners are entitled to offset these losses against other income earned, including their wage or salary.

By offsetting these losses, investors reduce their taxable income and will reduce the amount of tax they need to pay as partial compensation for making these losses.

The ability to claim the losses that are over and above the income generated against wage or salary income is only allowable because of negative gearing legislation.

Any proposed restrictions on negative gearing will be reducing a property investor’s ability to claim a tax deduction for these losses.

Recent data from the Australian Taxation Office (ATO) released for the 2013-2014 financial year shows that of the 2,842,139 Australians who receive a rental income for their properties, 1,691,355 do so at a loss. This means that 59 per cent of Australians who own investment properties are negatively geared.

Policy matters

Each of the parties have outlined their position in regards to negative gearing in the lead up to the 2nd of July 2016 federal election. Below is a summary:

Labor plan to restrict negative gearing tax concessions from July 2017, next year. Negative gearing will no longer be available on any second hand properties purchased. At this stage, no changes are planned for investors who purchase brand new properties.Capital Gains Tax (CGT) exemptions will also be changed under Labor. Currently, individuals or small business owners who hold an income producing property or other asset for more than twelve months receive a 50 per cent discount from CGT. The change proposed by Labor will mean that investors will only be able to claim a 25 per cent CGT discount from July 2017. An incoming Labor Government will be in a position to enact their policy as they are very likely to have the support of the Greens in the Senate. Labor’s policy would not be retrospective

The Greens plan to get rid of negative gearing tax concessions altogether. They also plan to reduce CGT discounts by 10 per cent each year from the 1st of July 2016. From the 1st of July 2020 there will be no CGT discount at all. The Greens are likely to seek support for their more restrictive policy from an incoming Labor Government as part of negotiations in the Senate

The Coalition has advised they will not be making any changes to current negative gearing concessions or to CGT exemptions. Negative gearing and CGT exemptions will remain in its current form under a returned Liberal/National Government.

The risks

Should the current Labor or Greens proposal be enacted, commentators predict that property prices will fall as a natural consequence of property investors largely deserting the marketplace. This is a real concern for all property owners.

Predictions vary from between 2 per cent price fall (Grattan Institute) to up to 30 per cent fall (Bill Moss). Obviously price declines will vary by geographical area and will be largely determined by the balance between supply and demand.

Education and proper understanding is key. We encourage you to review the policies in more detail and make an educated decision on polling day.

Should you have other questions, we’d be happy to help as best we can.

Bradley commenced employment with BMT in 1998, becoming a Director of the company in 2002, Managing Director in 2012 and Chief Executive Officer in 2015. As a result, he has substantial knowledge about property investment and specialist experience in tax depreciation and construction cost consulting.
Bradley is actively involved in educating property investors and property related organisations about the importance of tax depreciation. He is a regular keynote speaker and presenter covering property depreciation services on television, radio, at conferences and exhibitions Australia-wide.

Hi brad, in your review of the labour neg gearing policy, what is your understanding of how the policy will apply to existing properties already owned and negatively geared? ie will the policy be retrospective? or only apply to investors who buy resi property that is not new after July 2017?

if the latter, then wouldn’t that be an incentive for existing investors to hang onto their properties for a long time to keep the benefit of their existing neg gearing arrangement? Could we also see a rush to buy investment units prior to July 17 to lock in the neg gearing benefit?

If that is right, then are the commentators wrong predicting a desertion of the property market by investors? True they may not buy 2nd hand stock but isn’t that what the government is trying to manipulate to encourage new investment?

Hi Steve,
Thank you for your comments. Labor intend to limit negative gearing to new housing from 1 July 2017. All investment properties acquired prior to this date will not be affected by this change and will be grandfathered as you implied.
It is difficult to know what will happen in the lead up to 1 July 2017 should these changes come into affect. Some have predicted that investors could rush to buy investment properties prior to the deadline however the fact that future buyers won’t be able to use negative gearing could spook investors. I know many property investors bank on capital growth and if negative gearing is not available to all future buyers then the demand will be reduced along with the price.

Labour proposed changes.
In reference to the Negative Gearing changes, do you thing these changes would include properties already held?

In reference to the CGT, would this mean any property sold after the above date or only on properties purchased and sold after the date? We have properties which were purchased early before the boom and therefore have had good capital growth. If we sell after July 2017 would this be subject to the 25% change?

I am a property owner investor both old & new you mention the labor party changes if they win the election I ask will the rules apply to 2nd hand or old properties already owned IE I purchased 2 properties last year one of which is about 25 years old.

No doubt, property owners should support the Coalition. Let’s rally to elect the Coalistion candidates. The Coalition government is much better at handling economy for this country. It would be a dismay and even disaster for Australia if the Labour is elected. Let’s support the Leberals and the Nationals for the future of Australia!

Hi Brad
I have two new rental properties with you starting late June.
Are proposed changes to negative gearing going to be applied to existing properties second hand like mine?
Or are they only affecting properties purchased after the dates of change introduction?
Is the CGT the same or will that change affect all older properties also?

Thanks for the information and a clear comparison of what policy impact will have on negative gearing.
Whilst coalition is very clear on the policy, I am concerned the uncertainty and ambiguity lies around Labor policy and the influence The Greens can have depending on the election outcome.
Hopefully, the Australians will make the right choices on polling day depending how informed thay are.

Interesting insight Brad. What are your thoughts around the idea that scrapping negative gearing will increase rents? (thus making it even harder for first home buyers who are currently trying to save)

The Liberal Party last election promised no change to superannuation in there first term but they did change superannuation. I know the Gratton Institute is an Australian Public policy think tank. Bill Moss was head of property development at Macquarie Bank, It is easy to see where his interests lie. You head this email “Negative gearing : the facts for property investors” the end your email with “Education and proper understanding is key. We encourage you to review the policies in more detail and make an educated decision on polling day.” I find it disappointing that BMT has become involved in politics. I have negatively geared rental properties but personally I am more concerned with retrospective tax policy relating to superannuation by the Liberal Party in the last budget before the election. Voters have more to consider than single issues. In my opinon BMT should concentrate on what they have professional expertise and stay out of political commentary.

Hello, thanks for this informative article. I feel that the following points are of huge importance. 1. The 50% discount on CGT acts as an allowance for inflation as there is no other inflation indexation on CGT. If your investment appreciates at double the rate of inflation, you will pay the correct amount of tax on your real gain. This is either dishonesty or lack of understanding of their own policy (labor, greens). 2. Re negative gearing, currently you cannot use any operating losses to reduce your cost base when calculating CGT. I.E you will pay tax on gains that you did not make. If negative gearing changes, logically you will need to use all losses incurred during the life of your investment to reduce your capital gains cost base. Silence on this from Labor/Greens. Again, either ignorance or dishonesty on the part of Labor/Greens. I feel that some detail on these points could be added to your article. Best Regards, James L Bond

I think getting rid of negative gearing is good for the majority of people that find it difficult to buy their first home. So when property prices fall more can afford homes and purchase their first dream home. Also if more people own their own homes the in retirement less pressure for government accommodation. A huge saving for the GVT. Individuals can empower themselves by putting more money in Superannuation ,buy shares etc. In retirement no need to rely on the Gvt. It is also a good policy for governments to match contribution made by individuals into Super. The days are gone when Property prices doubled in 10 years. Very rarely this happens now..

THANK YOU. This matter has not received sufficient coverage in the media – yet. I suggest that prior to your article, many small scale property investors would not have been aware of the potential arising from the election – including myself. Whereas I respect your preference to remain apolitical, and believe you have fairly done so in your article, could I suggest you tread a little heavier in that grey area between politics and business. Your article needs much wider circulation immediately. I believe that any publicity would only be positive for yourself and your company.

As with many commentaries on negative gearing, you fail to point out that this tax ruling applies in essence to other forms of investment where losses in one area of business may be offset against gains in another. Also, the capital gains tax ruling applies to areas of investment other than property (eg., Equities). Removal of these rulings from property investment alone would be iniquitous, and likely create uncertainty in other forms of business investment at great detriment to the economy: facts evidently not understood by the stupids who espouse it.

Thanks Brad for the informative article. I am very disappointed by Labour and the Greens for their proposed changes. I am a Greens/Labour voter, but on this one, I am sad I will not support them.
But what I wanted to find out was, why would property investors not allowed to claim deductions just like an businesses who are claiming their expenses. ACCOS wrote a similar article a few months ago stating that it will be unfair for any Government to disallow investors in property market to claim losses when all other businesses are able to.
I shall find time to write Labour directly and advise them of my disappointment.
In recent months we have seen changes to property investment loans being tightened which has resulted in many people not borrowing, and the banks are now feeling the pinch. I saw it coming. Now they have reviewed those tight lending guidelines for investors.
We small time investors are risking our money to invest in property. We are willing to waiting for decades and decades for our invested money in property to gain. But we are now being kicked in the teeth by people who should know better. Greens and Labour have disappointed me.

Negative gearing is a subject that is very important and relevant to all present and future investors. Any changes to it will definitely have a material impact on the ability of investors to service their loans or the possibility of paying more CGT when the property is sold. With the proposed changes by the Labor/Greens, the investors get stung either way whether they keep or sell the property. I can not thank you enough for providing us with this very comprehensive and powerful information that is truly an eye opener to what each political parties stand for with regards to property investments. I will make sure fellow investors I know get this valuable info to also help them make an informed and wise decision relevant to the coming federal election.

Hi Brad
Excellent summary – mainstream press interested? print or radio?, Liberal party interested? REIA interested?
Great time to get some traction for BMT as well as the industry on this topic
Regards
Brenton

Thanks for your comments. Yes. Labor plan to halve the CGT for assets purchased after the 1st of July 2017. This will reduce the capital gains tax discount for assets that are held longer than 12 months from the current 50 per cent to 25 per cent.

Hi Brad, very important article for people to understand. What you have not made clear in your article is what effect the different parties policies (Labor and Greens) will have on investment properties already owned before proposed policy change dates and whether current negative gearing rules will be ‘grandfathered’ for those properties.

Question – Could you please clarify whether ‘Negative gearing will no longer be available on any second hand properties purchased’ apply to or impact existing investments of established ‘second hand’ properties?

Hi Stephen, Thank you for your feedback. Yes this is correct. Labor will halve the capital gains discount for all assets purchased after 1 July 2017. This will reduce the capital gains tax discount for assets held longer than 12 months from the current 50 per cent to 25 per cent.

Thanks for sending this information through but you need to go into more detail. I understand your “apolitical” situation, but someone needs to tell these idiots, that if investors can only negatively gear new homes, How is this going to help first home buyers? Anyone with half a brain, that wants an investment property, will purchase a new one! Generally speaking established suburbs are more expensive then new ones. So how is this going to help the first home buyers?
If you want to make housing more affordable it’s quite simple. Supply more land at reasonable prices! As a builder we are asked all the time to construct affordable homes but when a 400m2 block cost $400,000 how can we build and sell cheap houses?
If they take away negative gearing people will stop investing in real estate, supply will dry up eventually and rents will go through the roof!! That will really help the less fortunate that cannot afford to buy.
I know I’m stating what you already know but it is really annoying to hear this and the Liberals are not doing a god job selling it.
Let’s hope Labour doesn’t win!!!

Did Labour think this through? Firstly the rental market has to get even tighter if the many small time investors leave the market, resulting in higher rents. Secondly, if the real estate market will be subdued by this action so will be the income from landtax and CGT.
What a masterstroke!

Thank you for this easy to understand summary. I feel better informed and more at ease about the upcoming election. I recommend BMT to everyone for your great depreciation schedules but information like this is an added bonus.

Thank you BMT for clarifying the issues. I have supported BMT as they are efficient in handling tax depreciation. If labor wins this election its going to affect the entire economy of this country, currently due to the demand for investment homes, there massive employment in this area, win by labor will lead to disruption in this industry as many will stop investing and this will lead to collapse in this area.

People have stopped investing in mining shares due to mining collapse, now building industry will collapse as well, disastrous!! God save this country…….

Hi Brad, I work in the Pine River’s area (outer northern suburbs of Brisbane) and a couple of weeks ago it was hard to find a “For Sale” but just in the last two weeks everywhere I seem to go I see “For Sale” Signs pop up. I believe the tide has changed already and investors are jumping ship.

Great summary, thanks very much. It might have been asked and answered already.

I understand the proposed negative gearing legislation changes would only affect properties purchased after July 1 2017 but can you clarify whether the CGT changes are also only applicable to new investment purchases or will they affect all current investment properties as well?

Owning two investment properties already I guess I could deal with the negative gearing changes and just not purchase any more but the CGT impact (if applied to existing properties) is a different matter.

Hi Brad
I purchased a one bedroom unit 4yrs ago as PPOR, (its approximately 15-20years old) however will be moving out in September 2016 and will rent it out as an investment property. Because it was purchased few years ago, will the labour proposed legislation still effect my ability to negatively gear, or is it at the time of renting it out for the first time (being sept 2016)?

I was wondering i have a property which is empty land and i am looking at sub dividing to build 3 on it. if i don’t build all 3 by July 2017 will this still be existing property or considered new or do i have to do sub division by the 1st July 2017. ( i am thinking if the sub division stays in the same entity it hasn’t been re sold).

With the government expecting us to be self reliant for our retirement now, there isn’t a lot of ways the mum’s and dad’s of this country who are living on standard wages, can possibly achieve that. But owning an investment property could at least help to supplement our income. Most of us couldn’t do this on our own, without some form of tax break. And making it for new housing only, makes it unattainable for a lot of us. We aren’t necessarily purchasing one or two properties to get richer but to use as an income stream for when we retire. It’s our children that will benefit from selling it, when we are gone. I find myself in a generation of people that have to help their parents to survive because they have no superannuation and our adult children can’t afford to move out of home because the rents are so high. This all adds extra costs to us. Then we try and help our children get a deposit together but the housing prices just keep getting higher, making it unachievable. In amongst all this we are expected to put extra money into our own super, so we aren’t a burden to society. Meanwhile the governments continually change the rules of super and make us pay taxes over and over again. Our money gets taxed going in, while it’s in there and again coming out. It’s the same for our savings in the bank. Why aren’t they means testing it and put a cap on negative gearing instead? Once you own investment properties past a certain value point, you can no longer claim tax breaks on anything above that ceiling cap. Why should millionaires be able to access negative gearing, when they leave their own money sitting in the bank and borrow instead, to avoid paying taxes. What’s the government doing about all those businesses that are doing tax avoidance in Australia. If they made them pay their proper share of taxes, our schools and hospitals might actually be able to get more money that they so desperately need, instead of continually having it taken away from them. I can’t believe that we are in 2016 and there is still so many wrongs going on in the tax world. With the unfairness of the little guy lining the tax mans pockets, instead of big business and millionaires.

We are currently building a new house, which will become our principal place of residence. However, we will be moving away, after which the house will no longer be our principal place of residence as we will be purchasing another property. The house will be rented out after 1st July 2017. So because the house has originally been used by us and will not be a new house when we rent it out, from what I am reading we will not be able to claim negative gearing on the house and the CGT discount will be reduced to 25% if Labours restrictions are in place, is this correct?

Thanks for comments Stephen. Bill Moss is the former head of the property division of Macquarie Group and Founder of FSHD Global Research Foundation. For Bill’s interview regarding how factors such as housing supply play a role visit http://www.2gb.com/audioplayer/177121

Thanks for the education from a company looking after the people who do business with you. I didn’t see it as political but as factual. There will be an effect on investors pure and simple. Here’s something political though: interesting how some governments prefer to have you come rely on a government pension saying of course that they are trying to protect the young all the while increasing other costs like land tax, vehicle rego, road tolls, etc. These taxes affect the young and their aged parents.

Hi Paul,
If your Accountant believes there is a CGT event, then you should qualify for the discount. There are a lot of scenarios which will result in a CGT exemption. We recommend you talk to your Accountant before you sell.

No way will I vote Labor not after the mess that has to be cleaned up EVERY time they get elected, both Federal and all States. Only have to look at the record. Can’t believe how people put them back time and time again.
I think the capital gains tax should remain the same on all existing properties but be restricted on future purchases to NEW properties which should then stimulate the building industry and sustain more jobs. But leave the CGT as is.